What is an Annuity?
An annuity is a financial product that can be used to accumulate cash value on a tax-deferred basis. Annuities can be a great tool for individuals to secure retirement income or to convert existing assets into a stream of income. There are four main changes everyone faces in retirement—longer life expectancies, taxes, inflation, and market volatility—and annuities help to address all four of these factors.
By accumulating tax-deferred, certain annuities can grow larger before facing a tax liability. This, along with an interest rate of growth, helps to hedge against inflation. And because many annuities have guaranteed rates of return and are not directly exposed to the stock market, they are less susceptible to market volatility.
Most annuities have two phases—an accumulation phase and distribution phase. During the accumulation phase, premium payments are collected and cash value within the policy account grows at a pre-determined rate. Upon a triggering event, in most cases retirement, the annuity then begins to issue benefit payments. With a lifetime income rider, it is possible to receive benefit payments for the remainder of an individual’s life.
There are many different types of annuities, all designed to meet different needs. Additionally, the specifics of an annuity will vary amongst the carriers and policy type.
Types of Annuities
While there are numerous versions of annuities, there are a few basic categories.
- Fixed (FA)
- Fixed Indexed (FIA)
- Single Premium Immediate (SPIA)
- Deferred Income Annuities (DIA)
- Variable (VA)
Bear in the mind that the information above is simply a high-level discussion of annuities. To properly address whether an annuity is right for your specific needs or to determine what type of annuity best helps to achieve your financial objects, you should email or call us to discuss.